Five Things You Need to Know: Merrill Throws Good Money After Bad; Credit Card Delinquencies Surge; Holiday Internet Sales Growth Sags; One Unexpected Benefit of China's Burgeoning Middle Class: Poor Health!; Planes, Trains and Automobiles
What you need to know (and what it means)!
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Merrill Throws Good Money After Bad
If you are Merrill Lynch (MER), here is where you are. Aqueduct Race Track. Dec. 23. Eighth race. After poor decision-making earlier on the card, you now find you are out of cash. The right thing to do is to just go home. You know this. But the right thing to do was discarded seven races ago. A little voice in the back of your head whispers, "Just go home." But you don't just go home. Instead, you walk to the ATM, put your credit card in and take out more cash. You can feel the eyes of fellow railbirds on your back as you stand at the ATM waiting for the money to be dispensed. You know what they are thinking, and they are right: you are throwing good money after bad.
- Merrill Lynch, in an effort to raise cash amid mounting mortgage losses, agreed to sell the majority of its capital finance business to General Electric (GE) for an undisclosed amount, according to the New York Times.
- According to CEO John Thain, the deal will allow Merrill to reallocate about $1.3 billion of capital into other parts of its business; similar to the way going to an ATM will allow the horseplayer to wager on the last two races of the day.
- The deal will add more than $10 billion in assets and $5 billion in commitments to GE Capital's existing $260 billion in assets, the Times reported.
- In all, it's a sweet deal for GE, as Minyan Peter noted on the Buzz and Banter this morning.
- Among some cost savings due to synergies, it provides assets which GE can fund cheaply thanks to its AAA credit rating.
- It also represents an important mark in the credit bubble unwind; the first major sale of good assets to raise capital.
- Meanwhile, Merrill also said it will raise up to $6.2 billion in a private placement with Singapore's Temasek Holdings and Davis Selected Advisors, the Times said.
- Temasek Holdings will invest $4.4 billion in Merrill Lynch common stock with the option to purchase an additional $600 million of in stock by March 28, 2008.
- Davis Selected Advisors will make a long-term investment of $1.2 billion in common equity.
- Both Temasek Holdings and Davis Selected Advisors will be passive investors and will not have any rights of control and have no role in the governance of the bank, the Times reported.
2. Credit Card Delinquencies Surge
An Associated Press analysis of financial data from the country's largest credit card issuers shows Americans are falling behind on their payments and delinquencies are rising by double-digit percentages over the past year.
- The value of credit card accounts at least 30 days late jumped 26% to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP, the news service said.
- Defaults rose 18% to nearly $961 million in October, according to SEC filings.
- Until recently, credit card default rates had been running close to record lows, the AP said.
- Among those evaluated, Bank of America (BAC) had the highest delinquency volume, with overdue accounts valued at $5 billion.
- Bank of America defaults in October were almost 200 percent higher than in October 2006.
- The one exception in October was JPMorgan Chase (JPM), which reported declines in both delinquencies and defaults.
3. Holiday Internet Sales Growth Sags
U.S. Internet sales over the critical holiday sales period rose at the slowest pace on record, according to ComScore.
- According to ComScore, Internet sales from Nov. 1 through Dec. 21 increased 19% from the same period a year earlier to $26.3 billion.
- Spending via Internet sites, which makes up more than 3% of all retail sales, may reach $29.5 billion in November and December, ComScore estimated.
- By comparison, Internet retailers saw 26% growth in holiday online sales in 2006.
- Surveys indicate consumers are doing their holiday gift buying later this year than in the past three seasons, according to Michael Niemira, chief economist of the
International Council of Shopping Centers.
- On the bright side, however, last week FedEx (FDX) reported seeing an increase in the percentage of packages originating through Internet shopping.
4. One Unexpected Benefit of China's Burgeoning Middle Class: Poor Health!
As China's population ages and gains weight over the next 20 years, rates of stroke, heart disease and diabetes will rise, according to a 2006 report by the United Nations' WHO.
- That suggests a potential boom for pharmaceutical companies.
- According to Bloomberg, drug sales in China are rising twice as fast as in the U.S.
- Chinese drug sales were $14 billion in 2006.
- PricewaterhouseCoopers estimates that at the current rate of expansion, China will become the fifth-largest pharmaceutical market in two years.
- To seize the opportunity, Western drugmakers such as Pfizer (PFE) and AstraZeneca (AZN) say they have invested more than $1 billion in China over the past 15 years, Bloomberg says.
Planes, Trains and Automobiles
Maxjet Airways, a business class long-haul airline, collapsed into bankruptcy on Christmas Eve, stranding hundreds of passengers in the middle of transatlantic holiday journeys, according to the Financial Times.
From the company's Web site:
Dear Friends of MAXjet:
It is with deep regret that I must inform you that MAXjet filed Chapter 11 bankruptcy on 24 December 2007. With today's fuel prices and the resulting impact on the credit climate for airlines, we are forced to take this drastic measure. Our top priority is to assist our customers, particularly those who already have begun their travel with us, in securing alternative flight accommodations.
MAXjet has contracted with Eos Airlines for seats on Eos' scheduled all-Premium service to accommodate passengers awaiting a return flight between New York and London. Passengers needing return travel between London, Los Angeles and Las Vegas will be contacted regarding their flight re-accommodations. Any customers who choose to make flight accommodations directly should seek a refund from their point of purchase (credit card or travel agency) for the unused leg of their journey.
We have also secured hotel rooms in London, New York, Las Vegas and Los Angeles through early January 2008 which we will provide to affected passengers whose travel plans have been disrupted.
On behalf of the entire MAXjet family, we extend our apologies to you for the inconvenience. We are extremely saddened to discontinue a service that we so passionately believe in, and we thank our loyal flyers who helped build MAXjet since our start in 2005.
William D. Stockbridge
President and CEO
- The demise was swift.
- The company completed an initial public share offering only last June.
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